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Turkey hikes rates sharply to 35% to tame rising inflation

Turkish President Tayyip Erdogan attends a meeting with members of parliament on October 25, 2023. The central bank has decided to continue the monetary tightening process
  • Policy rate up by 500bps
  • Third rise in three months
  • Annual inflation now 61.53%

Turkey’s central bank raised its policy rate by 500 basis points to 35 percent as expected on Thursday, tightening aggressively for a third straight month as it steps up efforts to rein in the country’s inflation, which has soared for years.

The bank’s policy committee repeated that it was ready to raise rates further as needed to curb inflation, which climbed to an annual rate of 61.53 percent in September and is expected to continue rising into next year.

The one-week policy repo rate has risen by 2,650 basis points (bps) since June, and most analysts believe the central bank (CBRT) will tighten further in order to narrow the gap with inflation.

Timothy Ash, senior strategist at BlueBay Asset Management, said: “Bang on the consensus. The CBRT delivers again. It feels like we will see another two 500bps hikes now to year-end, with policy rates likely ending at 45 percent.”

The central bank said it “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour.”

The lira weakened slightly to 28.156 against the dollar after the announcement. It has fallen some 70 percent in two years, because of President Tayyip Erdoğan’s long-standing opposition to high rates and his influence over the central bank.

In a Reuters poll, most economists predicted a 500bps rise, while four forecast a rise of 250bps and one 300.

The bank said inflation readings were above expectations in the third quarter, with the strong course of domestic demand, the stickiness of services inflation and the deterioration in expectations putting upward pressure on inflation.

However, it said, the underlying trend in monthly inflation was evaluated as being on course to decline.

Policy U-turn

After Erdoğan was re-elected in May, he chose the former Wall Street banker Hafize Gaye Erkan as governor of the central bank. She has led a policy U-turn to relieve an economy strained by depleted FX reserves and surging inflation expectations.

Erdoğan’s previous support for low interest rates despite surging prices brought on a currency crisis in late 2021 and pushed inflation above 85 percent last year. Inflation is seen ending this year at 68 percent.

In past years, Erdoğan has repeatedly attacked tight monetary policy, describing himself as an enemy of interest rates. However, he has recently said that tight policy will help bring down inflation.

The lira weakened again this summer as the new economic team under finance minister Mehmet Şimşek eased the state’s grip on foreign exchange markets and moved away from unorthodox policies and regulations. The currency has lost a third of its value this year.

The central bank itself has tightened credit selectively and started to begin rolling back a costly scheme, adopted to halt the late-2021 currency crash, that protects lira deposits against foreign exchange depreciation.